On August 24, President Joe Biden announced that the Education Department would forgive between $10,000 and $20,000 in federal student loans for individuals making less than $125,000 a year and couples making less than $250,000. His plan also extends the student loan repayment moratorium to December 31, 2022, and lowers the minimum monthly payment for "income-driven repayment" (IDR) plans, and allows single borrowers making under 225 percent of the poverty line to owe no monthly minimum payment.
While this plan is far less generous than the universal forgiveness backed by Sen. Bernie Sanders (I–Vt.), it will still be costly to the public fisc in a way that we won't know for years. Why? Because the Department of Education has no idea how to project the costs of its own programs.
According to a July 2022 report from the Government Accountability Office (GAO)—before Biden announced his policy—the Education Department is projected to lose $197 billion on the direct loans it issued from 1997 to 2021. These loans, which have interest rates ranging from 2.75 percent (for undergraduate Stafford loans issued in 2020) to 8.5 percent (for some PLUS loans issued in the 2000s), were initially projected to generate roughly $114 billion in income for the federal government.
How did the Education Department become the worst bank in modern history? The CARES Act, which froze repayment, interest accrual, and delinquency collections on all federal student loans in response to COVID-19, accounts for $24.6 billion in Education Department costs incurred from March 13, 2020, to September 30, 2020. Then-President Donald Trump authorized two extensions of that moratorium, while Biden had extended it four times as of mid-August, and has now extended it for a fifth time.
Halting repayment on $1.6 trillion in debt for several years adds up, and those presidential "pauses" cost an additional $77.8 billion. But the cost of the extended pause beginning on May 2, 2022, and which will now end on December 31 rather than having ended in August, was not included in the GAO's estimate. We can tack on substantially more billions in cost for what we can only call the latest extension, not necessarily the last one.
The GAO found that the losses the Education Department is now facing date further back, to the Barack Obama and George W. Bush administrations. In 2008, Bush signed into law IDR plans, which pegged monthly loan payments for participating borrowers to 15 percent of their adjusted gross income and forgave the remaining balance of those loans after 25 years. In 2015, Obama shortened those numbers to 10 percent and 20 years for many borrowers. Now Biden is planning to shorten those criteria to 5 percent for all borrowers on IDR and 10 years for loans with initial balances under $12,000. Some borrowers will receive credit for a payment they never made due to making less than approximately $15 an hour.
The policy giveaways don't end there. Bush also signed into law "public service loan forgiveness," which requires the Education Department to forgive the balance of loans owed by government and nonprofit employees (including firefighters and teachers, but also physicians and attorneys) after 10 years or 120 months of qualifying IDR payments. Obama's Education Department created the "borrower defense to repayment" regulations that have allowed Biden to forgive billions in federal loans owed by former students of for-profit colleges.
All of these policies have costs that eclipsed the Education Department's projections, and that is because the Education Department sucks at projecting costs. Its cohort model makes behavior assumptions about future borrowers based on the behavior of cohorts already in repayment. But the economy changes every few years, just like student loan policy. While the GAO says the Education Department "is in the process of replacing its cohort-based student loan model with a borrower-based microsimulation model," the new model won't be in use until 2026, and there's no reason to think that accurately predicting the enormous costs of federal student loan policies will keep people like Biden from incurring them (on your behalf).
Even if you believe that policy makers junked up the federal student loan system with the best of intentions, the GAO report provides strong evidence that the federal government writing student loans that can be discharged by executive authority poses a massive moral hazard.
This article originally appeared in print under the headline "Writing Student Loans in Red Ink".